Money & Markets: Investors brace for debt default ‘calamity’

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Global stock markets are sinking this morning as investors batten down the hatches in advance of a potentially stormy week as the U.S. government spending shutdown standoff continues with no end in sight and as the Oct. 17 deadline for avoiding a federal debt default approaches.

Amid warnings that a default on its US$16.7 trillion debt would be an economic calamity, markets in Asia closed lower today, were sinking in Europe while North American futures were signalling a sharply lower opening here and in the U.S.

“Markets are getting more and more on edge after comments over the weekend from House Speaker Boehner that ‘the votes are not in the House to pass a clear debt limit, and the president is risking default by not having a conversation with us,’” notes BMO economist Robert Kavcic.

The Canadian dollar slipped below 97 cents US this morning as oil prices retreated to US$102. The currency rose a third of a cent Friday to 97.16 cents US but was relatively flat over the week, generally moving against the world’s other currencies in tandem with a weaker U.S. dollar.

And TD economist Sonya Gulati warns that “in particular, the Canadian economy would certainly be impacted if the U.S. government defaulted.”

However, she also notes that “most economists, including ourselves, are in the camp that a deal will be reached before the deadline, but the journey to get there will not be smooth sailing.”

And international credit rating agency Moody’s agrees, saying this morning that odds of a default are “very low.”

Meanwhile, the partial shutdown of the U.S. government means few U.S. economic reports will be released until the standoff ends, leaving analysts and investors flying blind in assessing the recent health of world’s largest economy.

“The partial government shutdown has already delayed the all-important September payrolls report, and August data on construction spending and factory orders,” notes BMO’s Kavcic. “This week the damage spills over to trade, retail sales and producer prices.”

That, however, may not be a bad thing, according to Bloomberg’s Matthew C. Klein who argues “the hiatus presents a good opportunity to take a step back and reflect on the downsides of our obsession with monthly data.”

The same could be argued for our obsession with the monthly economic reports especially Statistics Canada’s volatile and suspect employment numbers.

Regardless, there will be a near steady flow of data, and most of it monthly, on the Canadian economy throughout the coming week. That flow starts with August building permits today, then September housing starts, August international trade and a Statistics Canada assessment of the skills of Canadian workers tomorrow, the August new housing price index Thursday, and the Bank of Canada’s business outlook survey and the high-profile but volatile and suspect September jobs report Friday.

Analysts agree that the previous month’s unexpected surge of 59,000 jobs, most of which was in part-time work, won’t be repeated. Projections, reflecting the recent monthly results, are all over the map ranging from BMO’s still “solid” 25,000 increase but no change in the 7.1 per cent jobless rate to Scotiabank’s to “flat” result and a rise in rate to 7.2 per cent.

On the domestic housing front, BMO projects the reports will be mixed with building permits falling “heavily” from the previous month’s surprising 20.7 per cent surge but with housing starts having “rebounded somewhat” to 185,000 and in line with “demographic demand.”

Reitzes also projects that the Bank of Canada’s business survey will show “sales and investment expectations held steady, with uncertainty about the domestic and U.S. outlook tempering any positive feelings” and that “hiring intentions look to be little changed … consistent with mediocre job growth so far this year. Credit conditions probably tightened … consistent with the continued rise in bond yields.”

However, at least small business owners appear upbeat, according to a BMO survey results this morning indicating they “are more optimistic about the future than this time last year” with 62 per cent expecting 2014 will better than 2013, 55 per cent expecting their business will grow, and only six per cent anticipating some shrinkage.

While analysts will have to wait for an end to the current fiscal impasse in the U.S. for most federal government economic reports, the Fed will still release minutes Wednesday of its last policy meeting during which it unexpectedly decided against starting to taper its US$85 billion a month injections of stimulus into that economy.

“The meeting minutes should provide clues into the intriguing no-taper caper,” says BMO economist Sal Guatieri, who suspects “modest growth, rising mortgage rates, and government funding issues” were behind what some Fed officials have since revealed was a “close call” decision.

And the latest U.S. quarterly corporate earnings parade also begins in mid-week led by the financial sector, which CIBC economist Peter Buchan, notes is “expected to continue its winning ways, pacing a 3.2 per cent rise in overall earnings from the year-earlier period.”

Analysts will also have a variety of economic reports from Europe and Asia to digest including trade figures from Germany and Japan Tuesday, the latest monetary policy report from the Bank of England, now headed by Mark Carney, on Thursday, and the EU’s quarterly assessment of that region’s economy and finances.

Looking back, major equity markets, other than in Asia, ended last week on a positive note, though other than the Nasdaq most lost ground over the week. Canada’s S&P/TSX rose 23.53 points Friday to 12,758.65, getting added lift from soaring Air Canada shares, but was down two thirds of a per cent over the week. Also on Friday, the Dow rose 76.10 to 15,072.58, the S&P 500 11.84 to 1,690.50 and the Nasdaq 33.41 to 3,807.75.

In today’s and the coming week’s other economic and finance related news and events:

With U.S. President Barack Obama a no-show because of the fiscal crisis at home, no one’s expecting too much from this week’s APEC meeting in Bali but Prime Minister Stephen Harper won’t come home empty handed as he already has the offer of a $36 billion “gargantuan” LNG investment from Malaysia in his pocket.

Senior Bank of Canada officials will be speaking on panels in Washington D.C. on Friday during the meeting there of G20 finance ministers and central bankers.

The well-to-do are doing well, according to BMO Harris Private Banking study which found that Canadians with investible assets of $1 million or more believe they are more financially secure today than before the 2008 recession with 54 per cent feeling they are better off now and with only 11 per cent feeling worse off.

The recent pause in the U.S. housing market recovery, a key driver for the recovery in the overall economy, may the pause that refreshes, according to a CIBC analysis this morning which concludes that a “renewed upturn may be only a few months away.”

The U.S. fiscal crisis is “due to the explosion of mandatory spending related to social programs that cannot be offset in the long run by tax increases,” the Montreal Economic Institute claims in a report today.